" It is easy to see green
shoots when you are looking at scorched earth."
- Doug Dachille (First Principles Capital Mgmt, former
managing director at JPMorgan)

" If the Fed examiners
were set upon the Fed' s own documents, unlabeled documents,
to pass judgment on the Fed' s capacity to survive the
difficulties it faces in credit, it would shut this institution
down. The Fed is undercapitalized in a way that Citicorp is
undercapitalized." - Jim
Grant (of Grant' s Interest Rate Observer)

" Regulations are mostly a service
to crooks. They create a false sense of security. A lot of the
individuals you know personally who have recently suffered huge
losses in their investment portfolios are the living proof of
it. The shepherds do not work for free, and what starts as the
shepherd raising the sheep for their wool, usually ends with
the shepherd raising them for their meat." -
Richard Maybury (Early Warning Report, also CLICK HERE
for interview transcription on mal-investment and crooked regulators)

" A jump in financial speculation is
NOT an economic recovery. If the S&P 500 goes to 20,000,
but we are drinking $1500 beer and wiping ourselves with $100
bills, we have not gotten richer. Never mind the fact that an
S&P 500 of 20,000 DOES NOT create jobs." -
Graham Summers

MISCELLANEOUS MORSELS

◄$$$ GIANTS FALL, A SIGN OF THE TIMES
$$$. Exit General Motors and Citigroup from the Dow Jones Industrial
Index. The Citigroup colossus of financial embarrassment, corruption,
supermarkte failure, and Rubin misguidance is gradually being
and broken up. One of its parts is the Travelers insurance giant.
Replacing these two icons in the DJ Industrial index are Cisco
Systems (leading computer network corporation) and Travelers.
The changes to the flagship US stock index in my view precede
the bankruptcy liquidation of both GM and Citigroup, to come
in the next year. They are each doomed and not in the least
bit fixable. To put a little reality paint on the GM story,
pay note that the new GM Chairman is Edward Whitacre. He is
the former AT&T Chairman, hardly a great resume line item,
but worse, he admits he knows nothing about cars. Also, the
one common theme for the closed Chrysler dealerships apparently
is that they all were donors to the Republican National Committee.
USGovt management at its best. Hmm!

An aside… A very reliable indicator
that financial conditions have not improved much at all, despite
the contrived stock market rally is the total dearth of mergers
and acquisitions. The stock rally is a pure bear market
correction, and bear trap, the direct beneficiary of both accounting
rules relaxation (fraud) and huge monetary inflation leakage.
Executives have no interest in making big deals and forging
new relationships in this climate, which they collectively describe
as not good and not really recovering

◄$$$ NATIONAL HIGHWAY TRUST FUND FALLS
VICTIM, SURE TO PUT THE AXE TO COUNTLESS CONSTRUCTION JOBS $$$.
The falling gasoline price and reduced national driving habits
have cut deeply into the US Highway Trust Fund, which provides
a huge amount of funding to states for highway and bridge repair
and construction, plus more. Frank Holmes of the US Global Fund
calls attention to yet another budget crisis. He said, " The
US Highway Trust Fund will need an additional $7 billion by
August to finance projects already promised to states and keep
the fund from going bankrupt." The HTF is the primary
source of funding for road and bridge projects across the United
States. It is funded through gasoline taxes and taxes on other
vehicles like trucks. This is not the first time the HTF has
been on the edge of solvency. Just last September, Congress
approved a special $8 billion rescue to keep it from vanishing
to empty on the gauge. More bailouts are possible. The federal
gas tax has been 18.4 cents per gallon since 1993, unlikely
to be raised anytime soon, given the struggling economy and
the strained political environment. Here is one more acidic
wellspring that adversely affects the labor market, as states
continue to cut back under horrible insolvency problems. They
are making gestures to the USGovt to qualify for TARP funds.
So far, the big banks are the hog at that trough.

◄$$$ AIRBUS IS A FLYING PIECE OF COMPOSITE
GARBAGE $$$. After the Airbus crashed into the Atlantic Ocean
off the Brazilian coast and all 230 Air France passengers perished,
the investigation continues. Maybe it does not, since the fault
might be with the Airbus vertical fin design, which contains
the rudder. The French intelligence agency is working on evidence
used possibly to pin the crash on Islamic terrorists, as two
suspicious Arab types were on board according to the manifests.
In a new age where Bush II is gone from the scene, all evil
might no longer be linked to terrorists in mindless displays
of authoritarian abuse. The most likely explanation, apart from
a possible lightning strike during a powerful electrical storm,
is the fracture or separation of the vertical fin stabilizer.
The fin was found floating amidst the debris, with no visual
damage, which indicates it probably separated at high altitude.
The past is scattered with Airbus incidents involving the vertical
fin. An Airbus crashed on Rockaway Beach New York City in November
2001, another Airbus A300 model. That crash was blamed on the
failure and separation of the vertical fin and rudder, but the
official conclusion blamed the crash on pilot error. Sounds
like possible political pressure from European power centers.

By comparison, no Boeing 737 aircraft have
failed in their vertical fins in many years. Another incident
was an Air Transat flight over the Caribbean Sea in March 2005,
but was able to return to its Cuban point of departure without
any incident or lost lives. The pilot had noticed at high altitude
the Airbus A310 rudder had fallen off and tumbled into the sea.
Other non-fatal incidents have occurred. One came in 2002 when
a FedEx Airbus A300 freighter flight experienced strange ' uncommanded
inputs' due to rudder movements without pilot actions.
When FedEx conducted its own test on the rudder on the ground,
engineers claimed its actuators (the hydraulic system to control
the rudder) tore a large hole around its hinges, in exactly
the location where the rudders of two previous flights separated
from the rest of the aircraft.

The Observer has learned that
after one Airbus disaster, more than 20 American Airlines A300
pilots asked to be transferred to Boeings, although this meant
extra training and lost earnings. Some of those who contributed
to pilot bulletin boards last week expressed anger at the European
manufacturer in vehement terms. The National Traffic Safety
Bureau is the object of severe criticism in the United States,
as they consistently blame tailfin separation on pilot error
and ' aggressive pilot inputs' in what seems
like mindless conclusions. As BobO says, " Many times
' pilot error' means: the pilot made a big mistake
by flying that death trap!"

Airbus is Europe' s biggest manufacturing
company, having surpassed Boeing as the leader in the global
airliner market. British factories contribute major components,
including aircraft wings. The Airbus models rely upon composite
synthetic materials that are both lighter (and supposedly stronger)
than aluminum or steel. Fins, flaps, and rudders are made of
a similar layered composite on the A300 and A310 models. The
strength of composites depends upon careful criss-crossed layouts
of fiber grains, in anticipation of loads and directional stresses.
Gaps and irregularities in the layers can cause extensive de-lamination,
and loss of strength. Many government inspection programs depend
on visual inspection alone. Many analysts accuse Airbus maintenance
procedures of being grossly inadequate. Professor James Williams
of the Massachusetts Institute of Technology, one of the world' s
leading authorities in this field, said that to rely on visual
inspection was a lamentably naive policy, in his words. He and
other scientists have stated that composite parts in any aircraft
should be tested frequently by methods such as ultrasound, allowing
engineers to check beneath their surface with accuracy. His
research suggests that repeated trips to and from the sub-zero
temperatures common at cruising altitude causes a build-up of
moisture condensation inside composite layers, and subsequent
separation of the carbon fiber layers from cycles of freezing
and thawing. Over time, the gaps grow, and structural weakness
develops. Composite experts across the industry advocate state-of-the-art,
non-destructive testing of structural parts, yet civil aviation
authorities still only require ' naked eye' tests
or other basic inspections.

Thanks to CaptainK (former United pilot) and
BobO (former Boeing engineer) for the headsup information, which
points to yet another government agency cover-up at worst, and
incompetence at best. Political pressures seem obvious, since
Airbus is not a private firm, but a government subsidized and
managed enterprise. Most government agencies are in the pocket
of the very groups they are meant to regulate. The Federal Aviation
Admin was flawed from the onset, since its charter calls for
it to both ' promote & regulate' the aircraft
and airline industry. Promotion always wins; that is where the
money flows. Yes, Airbus is a flying piece of composite junk.
The upcoming Paris Air Show will surely provide some fireworks
and freely spoken criticism, which starts on June 15. See the
Bloomberg article for a competition playbook preview (CLICK
HERE).

BANKING POLICY CAUGHT IN A
BOX

◄$$$ USFED SPEAKS WITH TWO VOICES, BERNANKE
WITH MOSTLY DENIAL AND NONSENSE, BUT YELLIN WITH SOME WORDS
OF WARNING, AS THEY BOTH IGNORE HUGE NEW USTREASURY BOND ISSUANCE
AS A FACTOR, LIKE A 20-FOLD RISE $$$. Two weeks ago USFed Chairman
Bernanke told a USCongressional committee that the increases
in long-term USTreasury yields may reflect rising optimism about
the economy and concerns about large federal deficits. Such
a comment has one foot in the land of deceit, and one in the
land of reality. San Francisco Fed President Janet Yellen
has warned that policy makers need to be prepared for ' substantial
shocks' and that rising USTreasury yields may be a ' disconcerting'
signal of inflation fears. She made reference to the end
of an era of relative economic stability in the Western industrial
nations for over 20 years. Policy makers next meet June 23-24
at the Fed Open Market Committee to consider whether to increase
their planned purchases of $1.45 trillion of mortgage debt and
$300 billion of long-term USTreasurys. The next FOMC meeting
contains their monetization decision, or denial. The
reality is they must monetize! Yellen prefers a stable 2% engineered
price inflation rate, but the USFed gaggle had better prepare
themselves for much higher inflation in the near future.

USFed officials have begun discussion on how
and when they will need to start tightening credit and reduce
the unprecedented injections of liquidity into the financial
system. They are soon to find themselves totally stuck in continued
policy of rapid inflation. If the inflation spigot is turned
down, the system will grind to a halt, a systemic failure. They
cannot act upon propaganda of phony recovery, and cannot build
upon a phony accounting for bank balance sheets. It is like
diving onto a broken trampoline, with no lift. She indicates
a desire to learn how they created the current disaster and
what their policy has produced even in remedy attempts, an interesting
concept. They have suddenly become curious enough to calculate
the costs and benefits of leaving the benchmark US interest
rate near zero percent for many months. Can anyone recall the
denials by Bernanke that the US would ever resort to 0% rates,
made only two years ago? These people are clowns! See the Bloomberg
article (CLICK HERE).

Yellen said, " Recent experience raises
the possibility that the Great Moderation is behind us, so we
must be prepared for substantial shocks. We do not yet have
good estimates of the quantitative impact of such interventions
[bond swaps, endless rescues, balance sheet growth]. We simply
must understand better, and ultimately develop reliable models
of, the extraordinary financial and macro linkages that produced
the current crisis. [Near zero rates is certain] to incorporate
greater volatility than experienced over the past quarter century.
Truly, we are sailing in uncharted waters, marking our maps
with every bit of information along the way."

These folks at the US Federal Reserve are
flying blind, repeating their errors, and showing their confusion,
if not utter fear. They learned nothing from the identical
chapter in monetary history from years 2002 and 2003, when sustained
ridiculously low interest rates spawned bubbles and financial
fraud. Yellen warns about systemic shocks. She should. The list
of potential shocks includes bank system collapse or relapse,
a burst of price inflation, bond vigilantes riding on horseback
kicking up long-term rates, the Chinese pushing the US fraud
king bankers off the stage, a sequence of Black Hole USTreasury
Bond incidents attracting available capital, housing endless
decline acting like 2-ton wrecking ball on the USEconomy, even
gold default events coming to the COMEX. One should tend to
agree with her growing concern, if not alarm.

◄$$$ THE TRAGEDY IS THAT THE USFED
HAS NO EXIT STRATEGY, AND CAN HAVE NO EXIT STRATEGY, CONDITIONS
NOT OFFERING ONE $$$. The USEconomy is in recession. Arguments
of ' less bad' data do not work. The ultimate problem
is that banks remain insolvent (lies do not produce solvency),
households remain insolvent (foreclosures ramp up as house prices
continue down), the USGovt finances remain horrendously insolvent
(deficits are worsening), and US industry is slowly collapsing
(with General Motors the latest example). Bank lending remains
stuck, as lenders do not trust the viability of borrowers (job
losses are constant). Banks are being induced not to lend, since
the USFed offers them interest on reserves held by the USFed
itself. Why lend, when a small return is guaranteed? The options
left to the USFed are terrible. They can hike interest rates
during the most powerful recession the USEconomy has faced in
70 years. That will not work, a surefire disaster! They can
slowly drain excess liquidity, when available credit to households
(home equity) and businesses (corp bonds) and states (municipal
bonds) are under tremendous strain. That will not work, a surefire
disaster! They can continue the course and permit the bond market
to raise long-term rates and assure that the housing decline
actually accelerates downward in a worse fashion. That will
not work, a surefire disaster!

TRAGICALLY, THE USFED HAS NO OPTIONS AT ALL,
AND HAS EXHAUSTED ALL ITS AMMUNITION. A RATE HIKE WOULD POP
THE BIGGEST BUBBLE IN MODERN HISTORY, THE USTREASURYS. SUCH
A DECISION WOULD BREAK THE ENTIRE INFLATION MACHINERY AND ELIMINATE
ALL OFFICIAL RESPONSE MECHANISMS. Their only option left
is quarterly $1 trillion monetization, to produce powerful price
inflation, and to risk the fury of foreign creditors.
It is the coward' s back door escape, used to attempt to
inflate debts away and betray creditors. IN THIS CASE, ITS USAGE
WILL DRIVE CREDITORS AWAY. The US bankers will be forced to
embark on a publicity campaign in China, the Arab nations, and
elsewhere to sell their inflation plan. The harsh reality
that the face right now is that foreign creditors
have much smaller trade surpluses, and cannot finance the USGovt
deficits transformed into bond securities. The
monetization option stares at them directly. Refusal will force
a USTreasury auction breakdown, and death of its primary bond
dealers.

Take a quick examination of Exit Strategy options,
to quickly realize no viable options exist, period! If
the USFed does nothing, and continues the present course,
then a horrendous situation arises where the USTreasurys remain
the only investment around and the USDollar declines to the
point of lifting the entire cost structure of the USEconomy.
That is the Black Hole option. Easy money and free money for
the financial sector (a veritable syndicate) would enable more
bubbles to form, the primary location being the magnificent
USTreasury bubble. When the real cost of money, over and above
price inflation, is negative, huge risks arise for asset bubbles,
especially when the near 0% nominal cost persists for up to
a year and even more. Such very accommodative monetary condition
caused the current credit crisis. Its continuation assures similar
crisis, but most likely of a parallel type and not exactly the
same type, whose result would create new cancers. Furthermore,
a continued 0% policy assures the long-term rates will rise
from fear of price inflation and lost control, being seen right
now. The housing market would face further destruction, being
seen right now. On the other hand… If the USFed
begins to raise interest rates and to drain excess liquidity
in the banking system, then a horrendous situation arises
where the fragile USEconomy cannot even remotely withstand the
added stress. The credit derivatives would suffer terrible powerful
destruction, at first hidden, then in full view. The recession
underway would worsen with acceleration. A powerful feedback
mechanism is at work. If and when any recovery arrives, interest
rates would rise slowly at first, enough to trip the recovery
and interrupt it, if not derail it. With high likelihood the
rising interest rates would accelerate upward, due to Interest
Rate Swap control fixtures that unwind to wreck havoc.

The ultimate source of the systemic breakdown
into widespread insolvency was the housing crash and related
mortgage defaults. Here is the dilemma as it pertains to
the all important housing. A continued easy monetary policy
would accelerate the terrible housing market from
a mortgage rate standpoint. A new tighter monetary
policy would accelerate the terrible housing market from
an economic standpoint from worse job loss. Bankers
have great challenges finding worthy borrowers now, and with
tighter monetary conditions, even fewer borrowers would qualify
for the most basic of loans. Tightening monetary conditions
would more assuredly kill the USEconomy and US banking system
in rapid fashion. The mere talk of monetary tightening is lunatic.
It is motivated by knowledge of the extreme growing risk right
now presented by 0% rates, growing worse with each passing month.
Doing nothing, continuing monetary ease, assures price inflation
soon, and eventually powerful price inflation, forcing upward
the entire cost structure for the USEconomy and housing. Tightening
monetary policy, raising rates and draining the system, assures
the gradual death of USEconomy by means of the strangle of urgently
needed credit lines. The USFed is truly between a rock
and hard place, with no viable options, and it must know it!!!
The continued USEconomic recession absolutely ties the hands
of the USFed. THEY CAN DO NOTHING EXCEPT MONETIZE!!!
The USGovt and USFed are trying to reproduce the Good Ole Times,
to restore conditions back a few years ago. This is utterly
and irrefutably impossible!!!

◄$$$ GRANT CALLS THE USFED GROSSLY UNDER-CAPITALIZED,
EXPECTS PRICE INFLATION TO ARRIVE SOON, AND IMPLIES THE USFED
WILL AGAIN BE LATE IN TIGHTENING $$$. Jim Grant of the Grant' s
Interest Rate Observer is an elite credit market analyst
with a solid background and great track record, an undisputed
authority. He should be listened to. Grant opens by calling
the US Federal Reserve grossly under-capitalized, with $45 billion
in capital, but $2100 billion in assets, for a 47:1 ratio.
He does not believe the USFed could withstand a true audit,
even though a most unusual bank. Grant believes that 0% is the
wrong rate for any economy, no exceptions. It caused enormous
problems and is a sign of desperation, if not failure. He calls
' Quantitative Easing' money printing on a wholesale
level. He believes the monetary policy enacted by the USFed
represents a vast experiment in moral hazard, one that usually
results in far bigger problems eventually. He expects price
inflation will arrive sooner than expected, since $830 billion
in tinder lies around, even though it is ' soaking wet'
as he called it. Either economic recovery or passage of
time will dry the tinder. At the same time, he anticipates the
output gap to remain a big problem, meaning under-utilized industrial
capacity, as in prolonged recession. He claimed several examples
of a weak economy producing strong price inflation, a clear
slap at the prevalent stupid economist belief that strong growth
causes inflation (PURE HERESY). Despite a growing chorus that
expects the USFed to begin tightening its monetary policy soon,
Grant pointed out that the USFed has a long history of reacting
in late manner to all crises and bubbles. He cited 15 of 16
primary official bond dealers who do not see any tightening
before the end of the year. They must see the predicament and
lack of options facing the USFed. This view is repeated by ex-Harvard
and now PIMCO co-executive Mohammed El-Erian, who expects no
USFed change by yearend.

Grant sharply disputes the notion that an
institution is too big to fail, calling it one of our nation' s
greatest weaknesses. Saving what is too big and far too
unmanageable will be the ruin of the nation, in my view. Not
trying to be humorous, he cited the principle that there is
no such thing as a bad bond, only bad bond (wrong) prices. His
examples were the 2.1% USTreasury 10-year Note in December 2008,
and certain mortgage bonds selling at 50 cents to par value
a year ago. One should listen to his comments carefully and
take his warnings seriously. One can quickly infer that something
very unique and very ugly comes. The thermometer for the fever,
whether from either policy driven scenarios, is a skyrocketing
gold & silver price. Either price inflation or systemic
ruin with desperation actions will drive the precious metals
prices skyward. See his CNBC interview with Ariana Huffington
(CLICK HERE).

◄$$$ THE USFED IS USING ITS INTERNAL
LEVERS TO KEEP FOREIGNERS FROM ABANDONMENT $$$. Greg Weldon
provides a great glimpse inside the USFed inner workings, although
some will scratch their heads. USFed Chairman Bernanke is motivated
to maintain what Weldon calls ' fiscal sovereign credibility'
in order to satisfy foreign creditors and their demands for
US$ risk compensation. The USFed pays foreigner central banks
to hold USTreasurys in USFed accounts. As the USTreasury
Yield Curve tilts more steeply, the USFed reacts by paying out
more on deposits held into the future. The graph below includes
the USTreasury yield spread of 5-year versus 2-year (in blue)
and the Forward 2-year US Deposit Rate (in red), each hardly
household concepts, surely a bit abstruse and technical. They
are closely linked. Weldon wrote, " The rise in rates
is being DRIVEN by concern over fiscal sovereign credibility,
NOT anything linked to Fed ' action.' [This is] a
theme that is clearly evident in the overlay chart below which
reveals that the US Treasury Yield Curve has LED the
move in the (more Fed sensitive) Deposit Rate spread
(inverted), breaking out on May-21st, two weeks prior to the
move to new ' highs' in the strip."

◄$$$ ECONOMIC & POLITICAL DEAD ENDS
ARISE $$$. The United States policy makers, both monetary and
fiscal, are at deep odds, great opposition. They both subscribe
completely to the benefits of printed paper money as solutions
directed at problems. But they have little concept or appreciation,
let alone fear, of the aftermath. The Rubin Directive is to
put off problems until tomorrow. IT IS NOW TOMORROW. Policy
is being repeated that caused the current crisis. The harsh
reality is that abuse of paper money is a powerful addiction,
an elixir with a two-sided sword when applied. Most bailouts
to date have ensured that economic mal-investments remain, toxic
assets stuck on bank balance sheets, as failure and fraud continue
to attract huge funds. A high volume of money continues to be
wasted propping dead banks, restructuring failed car companies
and sustaining other ruined ventures like AIG and Fannie Mae.
The hundreds of billion$ devoted to rescues, bailouts, and stimulus
are the official protective actions to prevent the monster of
deflation from hitting, something Bernanke pledges never to
let happen. The result will be bank constipation, commodity
price increases, further economic liquidation, endless housing
decline and foreclosures, and a rancid acidic sickness much
like a deadly bacteria lodged in the body economic.

Deflation advocates direct attention to the
velocity of money in circulation. It has broken down badly,
during a time when unemployment is rising. The USFed official
Monetary Multiplier ended last week at 0.867, half its average
of 1.70 over the last decade. Thus one can easily conclude that
the credit mechanism is still broken. This is what happened
in Japan in its Lost Decade. Consumer borrowing in April fell
by $15.7 billion, now at a $2520 billion total level. Revolving
credit card debt fell by 11% annualized in March and April.
The USGovt and USFed preach avoidance of the Japan swamp
but are doing exactly what Japan did, only with more gusto,
more volume, and more power. They proceed down the only
path they know, pushed by political forces. The conclusion to
the casual observer should be that the US will earn not a Lost
Decade, but a calamitous path to a lost nation, a systemic failure
with all the lethal trimmings that come with prolonged insolvency.
The US operates without the benefit of trade surplus or industrial
output that Japan had. The Japanese enacted numerous stimulus
packages, each to sustain a wounded patient. So is the United
States. The Japanese refused to liquidate the largest dead banks,
but to prop them up as zombies instead. So is the United States.
The Japanese distributed funds in huge volume through structures
of dubious health. So is the United States. Sadly, the United
States should prepare for something much less benign as a Lost
Decade like suffered in Japan, a sure agony. In their struggle
to provide exactly the wrong solution, the monetary elite in
the United States, who control Wall Street, the US Federal Reserve,
Regulators, the USDept Treasury, and the USCongress itself,
will eventually doom the nation to ongoing stagflation at best,
and an devastating inflationary recession at worst. They are
going down the same Japanese road, only ours is dead end since
no trade surplus and little viable industry.

Either way, hyper-inflation is the real risk.
The best indicators of deflation not taking the upper hand in
price structures in my view are the crude oil price and copper
price. The USEconomic structure cannot take prices down if its
foundation of energy and metal costs are rising from USDollar
concerns, and protective measures. The cost of living will surely
rise for most American businesses and households, along with
unemployment and loss of homes. The officials in charge, the
financial crime syndicate, will opt for more power after they
created the crisis. The biggest risk is the gradual collapse
toward the governmental center, for both economic reliance and
financial sustenance. This trend is already clear. The result
could become a Black Hole, ending up in systemic failure and
USTreasury Bond default. Watch for both a concentration of banks
via consolidation and a concentration of power politically.
The former creates a Mussolini Fascist Business Model that cannot
remedy itself. The latter usually delivers a Fascist state in
its fully glory, eradicating liberty.

The immediate consequence is that enormous
USGovt federal deficits will result in unspeakable pressure
at USTreasury Bond auctions. So far, the stress has been handled
by steadily rising bond yields. The federal deficits will continually
be revised upward, as tax revenue drops but spending plans rise.
The threat to the USTreasury Bond ' AAA' rating is
entirely unjustified, kept as a global expedient. The largest
bubble in the world right now is the USTreasurys. The principal
creditors are fast losing confidence in it, led by China and
its consistently surly attitude. The pattern of debt liquidation
has a long way to go before completion, and IT IS NECESSARY.
Households and individuals should avoid both debt and leverage.
The onset of price inflation is a certainty. Great lengths will
be required of the USGovt stat lab rats to falsify the rising
price inflation phenomenon.

◄$$$ THE INTEREST RATE SWAP NIGHTMARE
CHAPTER IS SOON TO UNFOLD, AS LOST CONTROL OF THE BOND MARKET
BECOMES LIKE WILD HORSES TRAMPLING THE FIELDS OF GRAIN, SETTING
OFF LAND MINE EXPLOSIVES $$$. Not only has the housing market
stalled, with new mortgages and refinanced loans hitting a brick
wall. The other major threat is to the Interest Rate Swap, those
powerful credit derivative contracts that tie together the bond
world in complex knitting. The IRSwap actually controls the
USTBond market. The instability of USTreasurys on the long
maturity (10-year & 30-year) and on the short maturity (so
far just the 2-year) will surely soon unleash great firestorms
of disruption, heavy losses, and raging fires for the big banks.
A greater second chapter to the Credit Default Swap opening
salvo comes, with unclear timing. Twice as many IRSwaps exist
than CDSwaps, a story that bankers refuse to discuss. Over 65%
of credit derivatives are Interest Rate Swaps, which link long-term
bonds to the short-term LIBOR rate. They enable floating bonds
of different types to benefit from a lower short-term rate.
For over a year, the Credit Default Swaps (insurance contracts
for asset backed bonds) have garnered most attention from this
unregulated zone of darkness where financial nuclear bombs are
hidden with criss-crossed fuses. During the many months when
USTreasurys have had bond yields under 1%, the long-term USTreasurys
have also been absurdly low. No longer are long-term rates low,
as they have risen very quickly, too quickly. The IRSwap
contracts have been under tremendous strain, but have received
almost no attention. When short-term interest rates are
near 0%, and are used as the basis for powerful leverage in
IRSwap contracts, nearly infinite strain is applied. It is akin
to dividing by a number near zero in mathematics, like a point
of singularity in a discontinuous function in calculus.

The IRSwap contract has enabled for 15 years
the long-term rates to remain well below actual price inflation,
kept down by force from the control originated from USFed short-term
dictated rates. The astute forensic bond analyst Rob Kirby calls
the artificially low long-term interest rate the ultimate source
of financial market bubbles in the last two decades, ' a
pox on humanity' in his words. The falsification for 15
years of the Consumer Price Index goes hand in hand with falsification
of interest rates, both long-term and short-term. Interest
Rate Swaps form a powerful hidden leverage device, put at great
risk with 0% conditions due to excessive force applied.
The supposedly easy money comes with a heavy hidden price, that
being shocks to the structural foundation and its gradual hidden
weakness to the entire bond lifeblood to the banking system.
Next come explosions large and small in the Interest Rate Swap
arena. It will be the greater second chapter to the CDSwap opening
salvo. The IRSwap contracts have been suffering growing tremendous
strain. They assure tremendous and possibly catastrophic losses,
whose attention will come in the next few months. The instability
of USTreasurys in general will light a fire that rages inside
the big banks. Some competent analysts, who were not fooled
by the growing dangers that erupted into crisis last year, believe
that a volatile USTreasury Bond could destroy the US banking
system, delivering it final blows after the mortgage crisis
rendered it insolvent. The destructive mechanism is the Interest
Rate Swap contracts. The commercial mortgage losses, the Option
ARM mortgage losses, the credit card losses, these will add
to bank distress and in more cases failures. But the Interest
Rate Swap disaster looms close with heavily leveraged sledge
hammer blows, with sudden enormous catastrophic losses.

See Rob Kirby' s illuminating article
entitled " Theater of the Absurd: A View From the Inside"
(CLICK HERE).
He provides excellent arguments to make the case of profound
market interference, with diverse and profound damage to the
entire nation. In the article, Kirby travels through the bond
world to offer evidence that Credit Default Swaps lie at the
epicenter of the derivatives crisis. AIG is its most visible
victim of those insurance contracts. The Office of the Comptroller
of the Currency issues a quarterly report, which unfortunately
is lagged badly in its data provision. The four major villains,
all protected from prosecution despite a bank system failure,
are JPMorgan Chase, Goldman Sachs, Citigroup, and Bank of America.
Notice that a mountain of IRSwaps are traded, even though
no counter-party could possibly exist,
given the huge volume. The reason for grandiose IRSwap deployment
is simple: to keep interest rates low in strong-arm fashion.
Now their usage has begun to backfire, and danger rises for
major credit derivative accidents twice as great as the CDSwap
accidents that killed AIG. The victims list also includes Bear
Stearns and Lehman Brothers. A second list of dead financial
firms is very likely to be written before long.

◄$$$ CREDIT DERIVATIVES REPRESENT AN
UPSIDE PYRAMID, WITH UNSTABLE APEX RESTING ON AN UNSTABLE PLATE,
WITH SLIGHT WINDS AND PUSHES CAPABLE OF DISRUPTING ITS BALANCE,
RESULTING IN LARGE ACCIDENTS $$$. One should begin by realizing
that the credit derivative pyramid controls the USTreasury complex,
and not the reverse as it commonly thought. For a good primmer
on IRSwaps, their background and application, go to the PIMCO
website (CLICK HERE).

PIMCO explains, " At the time a swap
contract is put into place, it is typically considered ' at
the money,' meaning that the total value of fixed interest
rate cash flows over the life of the swap is exactly equal to
the expected value of floating interest rate cash flows. In
the example shown in the graph above, an investor has elected
to receive fixed in a swap contract. If the forward LIBOR curve,
or floating rate curve, is correct, the 5.5% he receives will
initially be better than the current floating 4% LIBOR rate,
but after some time, his fixed 5.5% will be lower than the floating
rate. At the inception of the swap, the ' net present value,'
or sum of expected profits and losses, should add up to zero."

JPMorgan alone has $66 trillion in notional
value of Interest Rate Swaps. They must constantly balance this
load, in what is called dynamic hedging. Risk must be managed
when bond conditions change in different locations within the
bond maturity curve. The dynamic hedging task has been rendered
very difficult, if not impossible, since so large. The
entire hedged position in IRSwaps greatly exceeds the value
of the entire USTreasury Bond market, a fact kept quiet by bank
officials. With most IRSwap contracts, fixed net payments
are made on a quarterly basis. So the hot fires that burn in
big bank basements must be dealt with each quarter, as loss
damages are assessed and paid for promptly. JPMorgan in all
likelihood is every bit as insolvent and possibly bankrupt as
Citigroup. Toss in the US Federal Reserve as likely insolvent.
The threat of a second fire in the credit derivatives arena
directly affects USFed policy. Any policy change would directly
affect the Interest Rate Swaps, and light fuses.

The USFed has no Exit Strategy available
to it, since raising interest rates would exacerbate a trend
that has begun without any direct active decision on the official
rate. In fact, the USFed typically telegraphs its change
in policy direction, mainly because the vast IRSwap control
devices must change course in ultra-slow movements. They cannot
change quickly or in big strides, since sudden movement is poison
to the credit derivative control structures. Recent talk of
USFed potential strategy changes serves as a trial balloon,
which in my view appears to be shot down to the dismay of the
cogniscenti, but ignorance of the investment community. The
bond market is shifting weights inside the JPMorgan rowboat,
and dangerously. The IRSwap represents a major obstacle to
reversing the easy accommodative monetary policy of near 0%
rates, but also serves as a coffin nail final blow to the US
banks. They are not recovering; they remain insolvent; they
face further losses; they are toast and destined for the dustbin.
Next comes the unraveling and Christmas Tree of explosions in
the credit derivative arena. The challenge will be for the USFed
and USDept Treasury and Wall Street to hide the fires and damage.
Given their quarterly feature of reconciliation, the smoke (if
not fires) will be easily seen, except at JPMorgan which is
exempt from all accounting.

The US car industry has traditionally been
a big user of variable rate debt and interest rate swaps. The
losses racked up by General Motors and Ford Motors are horrific.
The carmakers were able to offer low finance rates or zero percent
car financing from heavy usage of variable rate debt and Interest
Rate Swaps. Low car sales is a major part of their financial
woes, but widespread usage of credit derivatives provided an
income stream. Bondholders were truly bagholders. The other
side for Detroit carmakers is their active swap trade, where
they traded their bond yields (often over 6%) in return for
the low short-term rates, and collected quarterly income in
the process. An Interest Rate Swap disaster looms close, with
the big banks lined up for a kill. But now that GM is bankrupt,
many such swap contracts have been torn up, and many future
payments no longer have to be made by some big banks that traded
with GM.

Market Skeptics arrives at a conclusion. They
wrote, " A dollar collapse will drive interest rates
to infinity. Right now the financial institutions around the
world are sitting on trillions of toxic US debt, hoping it will
recover some of its value. However, a dollar collapse makes
the ' hold to maturity' strategy a losing proposition.
As the world realizes this, all manner of toxic US
debt will be sold as everyone tries to escape the dollar' s
devaluation. Bailing out the interest rate swap market will
be impossible. Fear of inflation will be the biggest
factor driving interest higher and causing stress in the interest
rate swap market. So printing money to help banks/companies
pay their swap obligations would just feed this fear and make
things worse. Potential damage from interest rates
swaps is INSANE… The notional amount of interest
rate derivatives outstanding in the second half of 2008 was
$418.7 trillion… There will be few survivors of this
interest rate swap apocalypse." See the Market Skeptics
article (CLICK HERE).

Credit analyst Felix Salmon describes great
distortions already evident. He wrote, " The market
in interest rate swaps is enormous, orders of magnitude greater
than the market in credit default swaps, and like most markets,
it is done some pretty crazy things over the past year, with
long-dated swap spreads going negative for
most of that time. Because there are not any systemic implications
of things like negative long-dated swap spreads, and because
the swaps market is a zero-sum game where for every winner there
is an equal and opposite loser, policymakers and bloggers and
pundits have not paid much attention to it." DeCarbonnel
recognizes it as the threat which could bring down the US financial
system.

COMPELLING MONETIZATION REALITIES

◄$$$ MONETIZING THE USGOVT DEBT VIA USTREASURYS
SERVES AS A TECHNICAL DEFAULT, MOST ASSUREDLY TO BECOME A REGULAR
QUARTERLY $1 TRILLION MONETIZATION PLEDGE, DESPITE UNPROFESSIONAL
INCOMPETENT VACANT PLEDGES TO THE CONTRARY $$$. USFed Chairman
Bernanke attempted to satisfy Chinese need for assurance, and
mollify their fears of currency debasement, by actually claiming
that the United States is not at risk of monetizing the federal
debt. Denial of monetization is preposterous, an extraordinarily
dangerous message and urgent message of either incompetence
of deceit, probably both. This absurd message comes almost
two months after a public pronouncement of monetizing $300 billion
in USTreasurys and $750 billion in USAgency Mortgage Bonds.
The Chinese must think the American bankers are not only crooked
but lousy liars, or worse, take their creditors as fools and
suckers. Monetization of the USGovt debt and deliberate deep
USDollar debasement continue apace. Desperate and manifest need
dictate its loud continuance in great volume. Ongoing bank losses,
households running on empty, ruined icon industries, primary
bond dealers put at risk, and larger than expected declines
in tax revenues assure without any doubt whatsoever that federal
deficits will be monumental, bigger than what most words can
indicate, and the object of monetization. At the same time,
USTreasury auctions are reaching a crisis stage, as primary
USFed bond dealers are under great distress, suffering losses
at yields rise in their intermediary role. The monetization
will not only occur again, but my forecast is for a quarterly
commitment of $1 trillion or more, each and every quarter to
come. If not, then the system will endure seizure on the
bond size and the system will drain like a Black Hole on the
financial market side apart from bonds. See my article entitled
" Quarterly $1 Trillion Monetization" (CLICK
HERE).

The group of 20 to 22 bond dealers with contracts
to sell USGovt debt securities is under siege, suffering a grand
new plight. The USFed primary bond dealers are being squeezed,
and word has spread like a nasty rumor, like wild fire. Curiously,
they have some power to respond, and can inform the USFed that
they monetize or else bonds go unsold, auctions fail very visibly,
with full embarrassment, and full harmful impact to the USTBonds
and USDollar simultaneously, tarnishing badly their image. The
bond dealers are at risk from rapid loss, and face a possible
sudden extinction, or basic resignation. Despite the rising
long-term USTBond yield, money going into USTBond purchases
in general is growing like a powerful torrent. Demand for
USTBonds is growing fast, very fast, a little understood phenomenon.
Bond supply is rising faster than demand though!!

The role of primary bond dealers is to hold
inventory as intermediaries, a prospect that makes those dealers
LOSERS right away as bond yields rise. They turn around and
sell the same bonds as quickly as possible. Auction sizes one
or two years ago used to be $5 billion, $10 billion, even $15
billion on a given month. Two weeks ago the official auction
was for $110 billion, a 10-fold increase. The pushback comes
from these primary bond dealers, who collectively possess the
power to tell their issuer (USDept Treasury) and their agent
(USFed) that buyers fail to arrive as bidders in sufficient
volume to absorb such huge regular supply. Buyers are big financial
institutions (like pension funds, bond funds) as well as foreign
central banks. Pressure is rising quickly for the Dept Treasury
and the USFed to monetize USTBonds again in order to lighten
the supply load, to take pressure off the primary bond dealers,
or else face a renewed crisis is created that could easily grow
out of control and force at least a temporary default. The $300
billion monetization commitment in March appeared to be a big
amount, but it was not. That amounts to two or three months
in supply, if the $1800 billion in USGovt deficits is to be
financed. The $1 trillion monetization MUST BE REPEATED, and
even become a quarterly event. Refusal by the Dept Treasury
and USFed to monetize could result in failed auctions, crushing
losses by the primary dealers, and their possible disappearance.

Three key points deserve mention, together
contributing as strong motives for quarterly $1 trillion monetization.
1) First, for years the USFed and its Wall Street agents
have succeeded in creating a phony USTBond rally prior to and
during official Treasury auctions. They did so by using many
devices, such as forcing stock indexes down, stressing news
stories of peak corporate earnings, citing economist pronouncements
of a likely slowing USEconomy, aided by Plunge Protection Team
entrances at technical chart spots. The result was a bond
rally that gave powerful tailwind assistance to the primary
bond dealers (NOW GONE). During their holding period as
intermediaries of USTBonds, they profited slightly, and with
volume, they profited heavily. That convenient tailwind has
turned suddenly into a headwind of hindrance, that now leads
to losses. The result will be a gradual ruin of primary bond
dealers. Watch in the next year for some to vanish and remove
themselves from this insider gravy train of former profits,
turned into current nightmare. 2) Second, a hidden bidder
in JPMorgan is extremely likely to come forth, but sure to remain
hidden. The bid to cover ratio on USTBond auctions must remain
over the 1.0 ratio, or else a bond auction failure is the case,
with huge shame and painful declines to the USDollar. As
word leaks that JPMorgan serves as a hidden bidder to tarnish
the integrity of the auction process, the credit market will
paint a big billboard sign that HIDDEN MONETIZATION is occurring.
The Dept Treasury issues USTBonds and the USFed brings them
to the credit market. But JPMorgan conducts the brokerage market
activity in the credit market. A gradual undermine should be
seen in the USDollar exchange rates, with or without monetization
being out in the open with full disclosure. Currency traders
despise monetization, and hate it even more when it is hidden,
as in with deceit. 3) Third, foreign producers
(both energy products and finished industrial products) have
much less trade surplus to recycle into USTBonds, their usual
destination.So the usual bidders will either
not show up at bond auctions, or they will bid much smaller
amounts when much larger bond volume come to auction blocks.
The USTreasury will be isolated in a powerfully damaging manner.
These three factors will force the Dept Treasury and USFed to
monetize and monetize and monetize, each quarter after quarter
after quarter. Eventually the financial markets will realize
the $1 trillion monetization must be a fixed quarterly event.
The effect on the USDollar will be enormous, enough for it to
plumb much lower lows than have been seen to date.

The trend is clear for those with open eyes.
The official bond auctions will continue relentlessly, probably
well over $100 billion per month, for perhaps twenty months
at least. Worse, the USGovt federal deficits will be much bigger
than estimated. Most assuredly, foreigners will have less money
to purchase the USTBonds. Here is an astonishing unprecedented
fact, during a time when shock is eclipsed regularly. The
USGovt tax revenues are down 35% year over year. For the first
time in US history, the tax collection month of April 2009 was
a net negative month. Expect the USTBond supply pressures
to build, not reduce. A certain USTBond monetization commitment
forestalls its official default at a later date.
The job losses continue in huge numbers. The home foreclosures
continue in accelerating numbers. The national home prices continue
in steady declines. The USEconomic recovery began in 2001-2002.
It was built upon a housing bubble as a foundation, whose bust
is absolutely not a completed process. The national insolvency
will take its toll on USTreasurys as a certain reflection. The
debt downgrade (imminent, scheduled, expected) of the UKGilts
three weeks ago awakened the world to the perception of the
USGovt debt as Third World debt paper as well. The fiasco is
tied to the USGovt committed debt being transformed into debt
securities, the USTreasury Bonds. It is a gigantic hairball.
It is like a rattlesnake swallowing a goat.

◄$$$ MONETIZATION NOT ONLY CONTINUES,
BUT IT HERALDS STRONG PRICE INFLATION IN FUTURE MONTHS $$$.
Do not listen to the Deflation Knuckleheads, some of whom are
very bright analysts. They are simply wrong, cannot anticipate
the spillover, cannot anticipate the GO signal given to banks
to lend again, and cannot even properly measure money anymore.
Sure, pockets of failed asset prices will occur. But in a strong
inflationary recession, losers and winners are in diametric
opposition. The setting has never been seen before, except briefly
in the 1970 decade. That was a quick sudden fever permitted
to rage. Today we observe powerful sustained events that are
not responding to any remedy, because the ultimate problem is
systemic insolvency. Banks are busted; households are busted;
USGovt finances are busted; much US industry is busted. The
rest is just a charade and shell game. Spending home equity
was actually an integral part of the grand liquidation that
has reached a new level.

Despite Mr. Bernanke' s recent protestations
that the Fed would not monetize federal debt, and despite misplaced
market expectations that the ' strengthening' economy
will cause the Fed to tighten, draining liquidity from the system,
the prospect of amplified monetization seems certain. In the
two weeks ended June 3rd, the USFed adjusted monetary base was
up 107.7% from a year ago, down slightly from the 113.4% annual
growth in the previous two-week period. The USFed can only
affect the monetary base, its primary tool for affecting the
money supply in the form of circulating currency and bank reserves.
Bank reserves are exploding. What is normally 4% allocated in
bank reserves has become 96%, in a giant constipation episode.
The annual growth in excess reserves is at 1813%, as evidence.
Despite all the hype of return to normalcy, banks refuse to
lend funds into the normal flow of commerce. The Shadow Govt
Statistics outfit provides an Ongoing M3 estimate of 7.3% annual
growth. The ultimate problem is insolvent banks, which cannot
proceed with expansion of loan portfolios or credit market assets
since they are broke. Their principal activity is shoveling
badly impaired toxic assets of miniscule value into reserves
after exchanging them for USTreasurys in the numerous USFed
liquidity facilities. Erratic money supply growth figures testify
to a continued bank crisis. The system cannot properly absorb
the orchestrated surge in bank reserves any more than a dead
man can process a meal shoved down his throat!

The USFed and USDept Treasury have embarked
upon a highly destructive course. Cheap money and easy credit
contributed heavily to destroying the US banking system and
USEconomy. Its acceleration is set to destroy a large swath
of capital. That is what excessive monetary inflation and uncontrolled
debt do. They destroy capital. In no way has the nation benefited
from broad capital formation and job creation. Since the
USGovt and banking authorities do not properly diagnose the
problem behind the crisis, they have ordered more of the
same ruinous cost-free money, and signed on for amplified debt.
The destruction phase will continue.

◄$$$ PRICE INFLATION WILL COME SINCE
CHANGE WILL COME $$$. John Hussman makes two great points on
the important matter of price inflation development. He claims
that price levels can remain under control only if the money
velocity is held down permanently. To maintain low money
velocity, the banks must keep their bank reserves over the current
95% level, something difficult to do as they gradually find
qualified borrowers and approve new loans. He claims that
price levels can remain under control only if the value of goods
& services is perceived as less than the value of USGovt
liabilities packaged in debt securities. As USTreasury Bonds
lose value, the mainstream goods & services appear to have
relatively higher value. The process kicks into gear. To maintain
the USTreasury bubble will be difficult, especially when supply
is overwhelming, especially when price inflation is seen as
a growing future risk, and especially when foreigners have less
trade surplus and diversify out of US$-based securities. Hussman
makes the strong point that bank losses will continue, as new
categories like commercial mortgages and formerly pristine prime
mortgages add to big losses, a parallel point to mine. He concludes
that the USEconomy must experience a 100% price inflation in
the next decade, in order to bring back into line the debt ratio
to the US Gross Domestic Product. That angle of reasoning makes
perfect sense for a price inflation long range target. A
double in consumer prices and the GDP price component would
result in a gold price of $3000 per ounce, and a silver price
of nearly $100 per ounce. See the excellent article by John
Hussman entitled " Anything But Academic"
on this important subject (CLICK HERE).

The rising M3 growth signals price inflation,
surely made much worse by severe signals of price pressures
generated by renewed weakness in the USDollar. The propaganda
party line from Wall Street, through its Dept Treasury control
room, is that rising interest rates have come from the early
stage of USEconomic revival and recovery. This is patent nonsense.
Crude oil prices and copper prices are reliable price indicators
of a weak USDollar in direct response. The US financial leaders,
who presided over a disaster, cannot admit that the weakness
in the USDollar comes as a market response to gargantuan bond
monetization and outsized federal deficits. They have contributed
to a price inflation threat, precisely when it is unwanted.
What comes is a staggering stagflation, actually worse, a powerful
inflationary recession.

Focus has been directed upon the USFed balance
sheet. Not only is it huge, but it is loaded with toxic assets.
The usual scenario is for them to sell their balance sheet to
the credit markets, and thus drain excess money from the system.
This time around, that process has a huge obstacle. They cannot
easily sell off these toxic assets in order to drain the excess
liquidity from the credit markets, enough to prevent a spillover
into the USEconomy. Most of those assets are worthless, and
many of them have small depleted markets where values have come
down enormously. Such a big drain would permanently cripple
the housing market anyway, which in turn would kill the banks.
Drainage as policy would cause a USTreasury bear market of monstrous
proportions, which would kill the USDollar. Therefore, price
inflation is coming for another simple reason that the USFed
cannot unload the plentiful garbage assets on its balance sheet,
cannot drain the excess liquidity in the banking system, and
cannot prevent a certain eventual spillover into the USEconomy.
In this sense, the only change to come will be spillover at
the top of the vast barrel. When price inflation arrives without
welcome, or even with welcome, the impact on the gold &
silver prices will be very big and very positive. The impact
on USTreasurys is uncertain. Holding the line on USTreasurys
will assure a powerful negative blow to the USDollar. Look for
both the USTreasurys and USDollar to suffer simultaneously,
in a perfect storm!

◄$$$ JULIAN ROBERTSON MAKES A BIG BET
AGAINST USTREASURYS $$$. Julian Robertson is a bonafide hedge
fund legend. He has generated stellar returns at his famous
Tiger Management fund. He has pioneered a successful investment
methodology, which has spawned several successful modern day
hedge funds, the ' Tiger Cubs' as they are known.
Robertson is recently acclaimed for his prediction of the financial
crisis over two years ago. He takes a macro approach, finds
a promising idea, researches it extensively, and places a large
investment position. Now comes news that Robertson has ' bet
the farm' on his next idea. His next big bet is on rising
price inflation. He recently said in eFinancialNews,
" Steepeners are a type of interest rate swap, where
one party agrees to pay the other a fixed rate in exchange for
a floating rate, which is derived from the difference between
long and short term rates. Many of these products also use high
leverage, where the difference between the two rates is multiplied
by up to 50 times to produce a higher return." He
has built a position akin to an Interest Rate Swap that profits
from rising price inflation. He anticipates that interest rates
could reach 7% rather soon on the long-term USTreasury Bonds,
and in future years could go as high as 18%. He first went public
with his Curve Steepener play in January 2008 in Forbes
magazine. That article described how Robertson was " long
the price of two-year Treasuries and short the price of the
ten-year Treasury, betting that the difference, or curve, in
the yield between the two will increase." Such a play
is negative on the US economy. Robertson executed it because
he felt the US Federal Reserve would continue to flood the economy
with money. He was dead on, exactly right, a forecast position
extremely consistent with the Hat Trick Letter. See the Seeking
Alpha article (CLICK HERE).

Robertson maintains very pessimistic forecast
view concerning the USDollar. He believes it will become so
weak that it leads the central banks of China and Japan to stop
purchasing USTreasurys altogether. Deep isolation would come
to the United States on a financial level, exactly my forecast
for several months. In such a scenario, 10-year bond prices
would move down as bond yields rise quickly. That is exactly
what we have seen. Back in January of 2008, Robertson told Fortune,
" I have made a big bet on it. I really think I am going
to make 20 or 30 times on my money." He has taken
a great firm stand on a thoroughly frightening scenario. He
is clear in his belief that the USGovt and USFed and Wall Street
have not solved the current problems. He expects conditions
could go from bad to much worse. He likened the current situation
of the US to that of Japan in 1990, except the US is in far
worse shape.

In his recent interview with Value Investor
Insight, two years after his original interview, Robertson
further describes his rationale for the large investor stake.
He says, " I am amazed at the amount of money the government
is throwing at this thing. You do not even react anymore unless
somebody' s talking about $1 trillion. I genuinely
admire the administration' s courage in doing what it is
doing, but not the wisdom of it. I look at the TALF
(Term Asset-Backed Securities Loan Facility) program, for example,
and it is almost a bribe to get people to put on more leverage...
I ask anyone to give me an example of an economy beefed up by
huge amounts of quantitative easing that did not inflate tremendously
when or if the economy improved. I think what we are
doing now will either fail, or it will result in unbelievably
high inflation, and tragically, maybe both. That
would mean a depression and explosive inflation, which is frightening."

Robertson is definitely not alone in his outlook.
Numerous other prominent investors and hedge fund legends share
his disdain for USTreasurys, which clearly have accepted much
of the financial market risk. Michael Steinhardt called USTreasurys
a foolish play over the long stretch. He labeled them as risky,
stuck with the low yields in danger of rising. The Steinhardt
Mgmt fund was one of the first truly successful hedge funds,
collecting a 24% annual return for almost thirty years. See
that Seeking Alpha article (CLICK HERE).
Steinhardt believes that the current market rally will not last
and that the United States has large fundamental problems still
unsolved. He said, " The economy is still a scary place.
My net feeling is that this rally does not have all that much
more to go and the dangers out there remain consequential."
He clearly sees the current rally as a temporary bear market
rally.

TURMOIL IN USTREASURYS ON ALL
FRONTS

◄$$$ TURMOIL IN THE USTREASURYS, AS LONG-TERM
RATES RISE, BUT A SPIKE OCCURS IN THE 2-YEAR RATE RISE $$$.
The main factor that Interest Rate Swaps CANNOT handle is volatility,
the absence of linear movement in interest rates that form the
underlying basis for these credit derivatives. Unfortunately,
instability has arrived and IRSwap risk is behind it. Distractions
are many from official sources. Blame it on the Chinese
for rebalancing, and seeking the safety of shorter time horizons
for redemption. Blame it on rising concern of extended moral
hazard with low low rates near 0%. Blame it on bond vigilantes
who foresee the rise of price inflation and the specter of a
whipsaw hitting the USEconomy. Blame it on at least one announced
huge monetization exercise by the USFed, and a likely series
of such exercises, enough to tarnish its own debt rating. Blame
it on growing lack of faith & confidence in the USGovt finance,
with federal deficits in the trillion$ for a few years, or as
they say, as far as the eye can see. My expectation is for the
USEconomy to suffer from an inflationary recession, where both
price inflation rages and the recession drags on as endlessly
as the housing decline. The stock market rally since the spring
has transferred hazard to the USTreasury market in a direct
handoff of risk. My other conclusion is that defense of the
USTreasurys will be seen and noticed, but unfortunately, the
risk will transfer to the USDollar. The buck will fall harder
when the credit derivatives continue to take their toll, and
burn through banker walls.

The initial reaction to the US banking system
collapse last autumn was to hunker down into the perceived safe
haven of the USTreasury Bond. It rallied enough to send the
10-year bond yield from 4.0% down to 2.1% insanely. The parade
was engineered by JPMorgan using bond futures contract purchases,
and the US Federal Reserve which opened global swap facilities
for foreign usage. As we see now, no such safe haven exists,
since the USTreasurys are an inferno of acidic debt and depleted
grease from the monetization printing presses. The 10-year
USTreasury yield (TNX) finally reached the 4.0% mark, and like
hitting any psychological point, backed off slightly. It has
worked through a two-step runup from 2.1% to 3.0%, and then
to 4.0% in completion. Look for the TNX to consolidate in the
3.8% to 4.0% range, much like a person digests a bad meal, complete
with a bout of nausea, more indigestion, and a visit to the
bathroom for relief. Later on, the TNX will march higher still,
in unison with a great many more outsized USTreasury auctions.
The TNX will next pursue 5.0% after consolidation. A
burst upward is possible after the 20-week moving average (in
red) crosses above the more stable 50-wk MA (in red), an imminent
event.

Losses discourage investors, especially auction
purchasers at the cusp. USTreasury 30-year Bonds have handed
investors a 28% loss this year versus 11% for the 10-year security
and 0.4% for two-year security, according to indices compiled
by Merrill Lynch. USTreasurys of collective maturities have
fallen 6.2% this year. The convention conclusions have missed
the mark on systemic instability, as rising rates are not from
newfound USEconomic growth, or even the prospect of such growth.
Focus on price inflation, cost structures, creditworthiness,
foreign creditor relations, flight by foreigners, and future
debt issuance. These factors are relevant. However, the
bond market volatility takes a big toll on Interest Rate Swaps.
They require dynamic balancing. Like a man with his family on
a large rowboat, the sudden shift of weight leads often to the
boat capsizing. Such risk exists with the credit derivatives,
except they are an armada of huge river barges loaded with bond
ore.

As if that is not enough, the 2-year USTreasury
Note has suffered even greater volatility. If the Chinese rebalanced
in May by moving more from long-term USTBonds to the 2-year
USTNote, then they have experienced sudden losses. Their resentment,
already strong, will turn acute. The upward movement by 50 to
60 basis points is sure to cause turmoil. IRSwaps hate sudden
movements and turmoil! Again, IRSwaps most likely caused the
turmoil. They did not suffer consequences of the turmoil. The
obvious conclusion is that official USTreasury auctions of magnificent
size have forced up bond yields and disrupted credit derivatives.
Huge upcoming auction supply could force the 2-year USTNote
yield to 3.0% quickly, enough to cause very large and very public
problems. The 2-year is not known to be the midterm bond, but
it is fast becoming the battleground. Finally, the reality of
USGovt deficits have smacked the credit markets like a hurricane.
The rise in bond yields is natural when supply arrives by the
truckload, after decades when it arrived in wheelbarrows. The
rise seen in the chart below is not normal. Nothing about the
USTreasury Bond market has been normal in the last several months,
from naked shorting of USTreasurys to gigantic USDollar Swap
facilities for foreign central bank usage.

◄$$$ USTREASURY AUCTIONS WILL CONTINUE
LIKE A NIGHTMARE, EVEN AS TAX REVENUE SHORTFALLS CONTINUE LIKE
A PARALLEL NIGHTMARE $$$. The official auctions have continued,
a veritable parade of debt securities for the financial markets
to absorb. It cannot absorb such huge supply. My unflinching
expectation is that the USFed and USDept Treasury will relieve
the stress to the system, stress on full display, by announcing
another monetization of $1 trillion for bond purchase, and do
so on a quarterly basis. In the last week, $35 billion in
3-year USTreasurys were auctioned at 1.960% on June 9th, and
$19 billion in 10-year USTreasurys were auctioned at 3.990%
on June 10th. Recall that just one month ago, auctions sold
the same 10-year USTreasury at 3.19%, which is unprecedented
and the source of sudden loss. The last week also had $11 billion
in 30-year USTreasurys auctioned at 4.720% on June 11th, in
a more successful auction. But a huge indirect bid came, usually
with fingerprints connected to central banks. They probably
were called in to remedy the tarnished image of the USTreasurys
in general. The week ended with some repair to damaged psychology,
thanks to central banks. They are not the real market, but rather
artificial and a type of monetization too. Federal tax revenue
is on the sharp decline, at a time when some foreign central
banks had been reducing their USTreasury exposure.

Before the Friday intervention, William Buckler
of The Privateer wrote, " Foreign central
banks are trying to slowly slip away from the USDollar and USTreasury
paper, mainly by lowering their holdings of foreign exchange
reserves. Smaller Asian central banks ran down foreign exchange
reserves by more than $US 300 billion in the 12 months to April
30. Russia' s reserves slid by $US 213 billion in the eight
months to March 31, the latest central bank data shows. If this
exodus by the smaller central banks is joined by many more,
the global run of USTreasurys is on. If even one of
the main central banks, China' s perhaps, were to join
in the sell-off, USTreasurys would be devastated.
US corporate tax receipts fell to $US 69.4 billion through May
versus $US 178.2 billion a year earlier, a decline of 61 percent,
the USTreasury' s budget statement said on June 10. Individual
income taxes received were down by 23 percent so far this fiscal
year to $US 592.6 billion compared with $US 769.2 billion in
2008. These falls of 61 percent and 23 percent in
tax revenue are a mirror image of the actual state of the real
US economy. But Washington DC is ignoring it. Instead,
Washington is trying to ' stimulate' the US economy
with one of the most amazing rescue packages in economic history.
The US government and the Fed have spent, lent or committed
$US 12.8 TRILLION. That is almost the value of everything produced
in the US last year, trying to stem the longest American recession
since the 1930s."

◄$$$ MAINSTREAM MEDIA SHOWS HINT OF BANK
RUIN REALITY, CONCEALED BY ACCOUNTING RULES ABANDONMENT $$$.
Give some credit to Bloomberg, although they are late in their
warning, that the Q1 stock rally was founded on phony accounting.
In an article entitled " Bank Profits From Accounting
Rules Masking Looming Loan Losses" by Yalman Onaran
dated June 5th (CLICK HERE),
they publish news that we in the Hat Trick Letter read about
in the April issue, how accounting rules abandonment permitted
dead banks to appear to book profits on the quarter from supposed
' improvements' to their balance sheet. This is far
more than just permitting full value on credit assets, assuming
the banks hold until maturity. Martin Weiss of Weiss Research
in Jupiter Florida begs to differ, offering a splash of harsh
reality. He said (quoted in April also), " The big banks
profits were totally bogus. The new accounting rules, the stress
tests, they are all part of a major effort to put lipstick on
a pig." Banks look stronger than they really are,
even though Treasury Secy Geithner claims the Stress Tests show
the big banks capable to withstand a somewhat worse USEconomy.
They cannot and will not. Onaran wrote, " The government
probably wants to win time for the banks, keeping them alive
as they struggle to earn their way out of the mess, says economist
Joseph Stiglitz of Columbia University in New York. The danger
is that weak banks will remain reluctant to lend, hobbling President
Barack Obama' s efforts to pull the economy out of recession."

The charade permitted the big banks to raise
$43 billion in capital, when they are essential insolvent and
teetering toward death. Confidence is a tenuous slippery concept,
which can be stolen, but can be lost quickly. The stolen quarterly
profits are derived from accounting rules relaxation, which
permit the banks to declare the value they choose on dead assets.
A worsening USEconomy will reveal the phony patchwork on these
derelict vessels. Janet Tavakoli is president of Tavakoli
Structured Finance in Chicago. She claims the government stress
scenarios underestimate how bad the economy may become.
For example, the USFed designed the Stress Tests with easy low
fence thresholds, such as the 21% to 28% loss rate for subprime
mortgages as a worst-case assumption. Already, almost 40% of
such loans are 30 days or more overdue, according to Tavakoli,
who forecasts the defaults on these toxic assets to reach 55%
easily. Almost no major news syndication published contradictory
news on the bank rally from death. These banks are true zombies.
Occasionally Bloomberg puts a stick in Wall Street' s eye,
and this is such a time. It takes courage. If we had more like
Bloomberg, the US would be a far better place.

◄$$$ GEITHNER ELICITED LAUGHTER IN MOCKERY
DURING A BEIJING VISIT, AS THEY PUT HIM IN A SMALL SEAT AT THEIR
GROWING TABLE. $$$. The disrespect and embarrassment is acute,
worthy of a Saturday Night Live episode on NBC television, complete
with derision. Geithner told the audience of students that
their national savings in US$ denomination was safe. They erupted
in immediate laughter, probably being much better informed than
even the US public. The US press did not report on or photograph
the reaction by Geithner, replete with certain embarrassment.
Bear in mind that Chinese students are extremely obedient, rarely
to embark on spontaneous displays in official gatherings. They
were most likely instructed to show some disrespect to the American
Banking Witchdoctor at any appropriate time.

The Chinese clearly do not take American bankers
seriously anymore. They are fed up with childish irresponsible
accusations of yuan currency manipulation by USGovt officials,
when the biggest manipulators on the planet are the US-UK fraud
kings, who have rigged the USTBond, USDollar, and gold markets
for twenty years. Geithner angered the Chinese credit masters
in his first week in office, with currency manipulation charges.
The Chinese officials called Treasury Secy Geithner to Beijing
to warn and scold him about monetization and ruinous US$ risk.
In private meetings, they might have forced yet another grand
concession, like the Eminent Domain possibly granted to Secy
State Hillary Clinton a couple months ago. One should anticipate
that the Chinese will continue their support of USTreasury debt
only if given very large bargained agreements in return. They
will demand it. We as people will not learn what they are until
much later. Watch who travels where. If USGovt officials
continue to travel to Beijing, and with greater frequency, then
China is pulling on a tight leash.

THE CHINESE REACTION TO FURTHER MONETIZATION
WILL BE INTERESTING TO WATCH. MY PERSONAL BELIEF IS THAT THEY
INSTRUCTED GEITHNER THAT ALTHOUGH THE USGOVT MUST MONETIZE ITS
USTREASURY SALES, THE CHINESE MUST ACCUMULATE GOLD AND GIVE
IT MUCH GREATER LEGITIMACY IN THE GLOBAL CURRENCY SYSTEM. CHINA
WILL NOT BE DENIED THEIR SEAT AT THE GLOBAL FINANCE MINISTER
TABLE.

The Chinese have begun to take protective measures
on their vast $2.2 trillion US$-based holdings. They are clearly
diversifying toward the short-term maturity, selling some long-term
maturity. They might be selling some USAgency Mortgage Bonds.
They might be purchasing gold with proceeds. They might plan
to exit the 2-year USTreasurys traded down after two years,
and not roll over. That would cause big problems for USGovt
forced redemptions at a future time, and lead to extremely large
monetization. The Chinese clearly are working a plan. They take
action on reserves management. They make complaints about US$
risk. They publish news openly on US financial matters. They
call to Beijing their indebted serfs. They are extremely patient.
They read the works of Sun Tzu on the art of war, and have turned
the tables in the financial wars. They want respect and a major
seat at the global finance table. In time, they will become
the world' s foremost and most important bankers, eclipsing
the Arabs.

Bloomberg made the following statement two
weeks ago. " Seventeen of 23 Chinese economists polled
in connection with Geithner' s visit said holdings of Treasurys
are a ' great risk' for the nation' s economy,
according to a Chinese state media report. Still, the majority
argued against quickly cutting them, the Beijing-based Global
Times reported."

MANY SIDES OF DAMAGE TO USECONOMY

◄$$$ NBER WARNS OF CONTINUED RECESSION
RISK $$$. The National Bureau of Economic Research is the designated
official economic analyst group in the United States. They are
charged with declaring the beginning and end of recessions.
They pitched in an opinion recently of legitimate warning, but
unfortunately it contains swallowed propaganda. They stated
while the USEconomy is showing signs of stabilizing from a recession
that started in December 2007, it is ' way too early'
to say the contraction is over, according to Robert Hall, the
head of the NBER and Stanford University professor. He said
the Gross Domestic Product estimated on a monthly basis " had
a trough earlier this year, but it is way too early to say that
it is a true trough rather than a pause in a longer decline.
We waited a long time to declare the 2001 trough [end of last
recession] because of the disagreement among indicators, and
we probably will have to wait a long time in this cycle as well."
The GDP had no low point whatsoever. My opinion of US university
economics professors is only a little more positive than for
USGovt economists, after numerous private debates with PhD Economists
in the last 15 years, even Ivy League PhD Economists. They have
alarming blind spots, stick with ruinous dogma that has earned
the nation a crisis likely to end in tragedy, and cannot see
anything but benefits from paper money and all the freedom it
offers financially.

The NBER relies upon several key indicators,
worthy of listing in order to properly observe how misdirected
and poorly focused this elite economic agency is. They rely
upon job payrolls, which have fallacious lifts from the Birth-Death
Model and constantly changing seasonal adjustments. They rely
upon existing home sales, whose numbers are rising from foreclosure
bank sales. They rely upon consumer confidence measures, which
are as ethereal as they are useless in my view, but reflect
retail sales, a big downer lately. They rely upon manufacturing,
which has slowed in the pace of its decline. The ISM Manufacturing
index for May was 42.8, versus 40.1 in April, a move in the
right direction, but still under the important 50 level that
marks a recession in progress. The National Purchasing Manager
index for May was 34.9, versus 40.1 in May, a move in the wrong
direction. The NBER relies heavily upon the Leading Economic
Indicator, a composite of several indexes like these cited.
Unfortunately, heavy weight on the LEI is given to the S&P
stock index, whose rise was engineered by the Plunge Protection
Team, and whose foundation was phony bank accounting, which
permits asset losses to be called gains for profit. See the
Bloomberg article (CLICK HERE).

My best economic indicator is something
difficult to fudge in falsification, the capital expenditure
for business. It is the rate of change for non-defense,
non-transportation business equipment purchases, otherwise called
capital expenditures, or Capex. It is the durable goods order
rate, excluding the Boeing aircrafts and military defense contracts,
which are both irregular and very large. The Capex is stuck
on the negative side, at minus 1.5% in April after minus 1.4%
in March. It is also never discussed by leading economists,
for some odd reason, probably because it is so accurate a forecast
tool and often contradicts their stupid forecasts that are proven
consistently wrong. As a group, they are wrong about 80% of
the time. The Capex is very simple to monitor and interpret,
as businesses that plan to expand purchase equipment in order
to do so. Almost no business expansion goes without some equipment,
like computers, cash registers, air conditioners, industrial
machinery, telecommunications gear, monitor scopes, air conditioners,
and so on.

◄$$$ PERMANENT STAGNATION & DECLINE
COME, WITH SHOCKS TO PREVENT OUTRIGHT COLLAPSE $$$. When the
engrained problem is insolvent, a great stagnation arrives.
When the solution is more of the same medicine that produced
the problems, a great stagnation arrives. André Pinheiro
de Lara Resende is a noted Brazilian economist who makes some
excellent points. His preface hit hard, as he wrote " Given
that a large part of the assets acquired by the Fed, financed
by the expansion of its monetary liabilities, are irrecoverable,
it results in the transformation of private debt into public
debt. The justification to commit public funds in such a scale
is to try to avoid the collapse of the banking system and to
make it resume lending. So far with no success; and
it will probably remain unsuccessful, as long as the private
sector remains over-indebted, classic monetary policy is incapable
of stimulating the economy in the present circumstances.
The economy, however, almost two years after the beginning of
the crisis, continues to be overwhelmed by unredeemable debts.
As long as households and firms continue to bear the brunt of
excessive debt, they will try to reduce expenditures and increase
savings. Until debt is reduced to levels which are perceived
as reasonable, the private sector expenditure will be exceptionally
low." He recognizes the problem as insolvency and
a crippled central bank.

Resende compares rightfully the American economic
condition with the Japanese economy after the real estate and
banking crisis of the nineties. He points out that excess debt
and deep insolvency cannot be treated in conventional rescue
and stimulus fashion. Neither monetary policy nor fiscal policy
can bring life to the USEconomy. Since the savings rate rises,
since much of stimulus is devoted to payment of debt (like credit
cards with heavy interest charges), and since basic living expenses
are the destination for most government assistance, no business
expansion occurs. No chain reaction economic activity is remotely
likely, and no pent-up demand exists. As he said, " The
virtuous circle of the Keynesian expenditure multiplier is thus
interrupted." Resende grasps the importance of the
housing sector for USEconomic growth as a perverse foundation,
and the whipsaw for its reversal. He assessed, " Since
the rise of asset prices is fueled by rising indebtedness, from
a certain point onwards, the process acquires a pure speculative
character. When the rise in asset prices is interrupted, the
private sector discovers it is insolvent. Real estate bubbles,
especially residential real estate bubbles, being a speculative
process based on assets of a wider ownership, are the ones that
more damage cause when exhausted." He connects the
futility of monetary policy during a period when private household
insolvency abounds. He purports that usage of monetary policy
to keep an insolvent economy alive actually renders fiscal policy
as useless for economic stimulation. In other words, low
interest rates become useless to those suffering from too much
debt, from which it follows that government programs (read:
handouts) become useless in generating new spending or forming
new businesses. Capital formation does not occur, thus no remedy.

Resende offers no alternative for remedy for
the US situation. Either permit a collapse to rid the indebted
condition, or suffer the agony of an endless quagmire. The
USGovt has already chosen endless quagmire due to its chosen
debt solution. He wrote, " There is not much of an alternative.
Either to let the economy collapse, in order to reduce debts,
and then use fiscal policy to revive it, or inundate the insolvent
economy with public credit, to avoid the collapse, and lose
the ability of fiscal policy to pull it out of a prolonged lethargy.
Either a horrible end or an endless horror. The US
will most likely face a long period of stagnation."
The option of profound monetary inflation, and in my view chronic
monetization, carries with it a very heavy price. He believes
the US will lose its credibility as issuer of global reserve
currency debt securities, namely USTreasury Bonds in USDollar
denomination. He correctly gives strong possibility to the outcome
of strong price inflation and sudden devaluation of the USDollar.
However, an excess of monetary inflation and federal deficits
risk exactly these, eventual price inflation and gradual devaluation
of the USDollar. He advocates some monetary inflation and
some federal deficits, as long as they can be kept under control.
THAT IS NEXT TO IMPOSSIBLE, in my view, but an approach that
must be politically attempted. He advocates at the same time
for indirect reduction of debt burden via inflation during simultaneous
stimulus actions. The creditor nations pay the price in hidden
fashion, likely with resentment. He concedes, " It
is thus understandable that China, the largest withholder of
American public debt bonds, does not feel comfortable and proposes
the creation of a supra-national reserve currency."
He sees China as actively working to de-throne the crippled
USDollar, as is my perception.

Resende calls for a supra-national reserve
currency, a global basket. Actually no new currency would be
involved. He plays down the hyper-inflation risk from printing
presses gone haywire and the associated USDollar devaluation.
But he does give such a threat some credence. He believes
a new supra-national reserve currency would work to solve some
incredible large imbalances that strain the global economy.
Almost alone in the world outside China and Russia, where the
view is growing in acceptance, he cannot envision
any solution within the current framework. He
calls for action with urgency. That is shared vigorously by
my view. He concludes, " The creation of a true supra-national
reserve-currency would reduce the impact of an eventual devaluation
of the dollar. It would also be a fundamental tool to reverse
the asymmetry behind the large macroeconomic imbalances of the
last decades. A world currency would require a credible supra-national
issuer... The comprehension that the macro imbalances
that brought us to the present crisis, and also hamper its resolution,
can only be corrected within a new global institutional
framework should give a sense of urgency to
the agenda." A true solution only can come
from a new global currency, at minimum a basket of existing
currencies, at best a gold-backed new currency.

Graham Summers has a way with words. The economic
analyst, market strategist, and contributor to Seeking Alpha,
offered an opinion on the Coming Economic Collapse. He expects
this autumn will prove the ' worst is over' crowd
wrong yet again. He wrote:

" To give you an idea of how big a
problem these deficits are, consider that the US government
could tax its citizens 100% of their earnings and NOT have a
balanced budget. In light of these issues, the government' s
$787 billion stimulus package does not exactly breed confidence
in an economic turnaround. Incomes have lagged inflation in
this country for over 30 years. Creating a bunch of temporary
positions related to construction and the like is NOT going
to alter this in any significant way. Moreover, most
of the job growth in the last 10 years has come from bubbles:
two out of five jobs created between 2002 and 2007 came from
the housing industry. The irony here, of course, is that the
Stimulus Plan is merely following this trend, creating jobs
from our latest (relatively unreported) bubble: the
bubble in government spending and employment. Bottomline:
the US needs to create sustained job growth involving skilled
professionals with high wage earning potential, NOT more guys
laying concrete. We need fundamental structural changes to the
US economy, NOT temporary positions resulting from one-time
government projects. And with a $9 trillion deficit in the works,
$787 billion does not really mean much in terms of increased
tax receipts. Also, and this is bit of a personal aside, it
is hard to believe that throwing $787 billion towards creating
jobs really shifts our economy away from financial services
when we have thrown over $2 trillion towards Wall Street and
the banks (via direct loans and lending windows)."
An excellent final point, that the solution so far has been
to direct funds at the very sector that must be shrunk or exterminated,
the Wall Street firms that caused the crisis and national failure
in progress.

◄$$$ MAY JOBS REPORT ONLY SLIGHTLY LESS
HORRENDOUS LOSSES $$$. The official figure is for a May loss
of 345k jobs, with the jobless rate up to 9.4% (collecting state
jobless insurance benefits) but at 16.4% in the U-6 broader
jobless rate (that counts people actually without jobs). The
official doctored jobless rate rose from 8.9% in the previous
month, for a still hefty rise. The April job loss figure was
revised to the positive side by 35k jobs. However, the villain
in the room is again the Birth-Death Model, that work of fiction
that rises to the occasion to help on the propaganda front.
The B-D Model added 220k mythical jobs in May after adding 226k
mythical jobs in April, at a time when small business is in
fast retreat. Free of such nonsensical adjustments, April lost
730k jobs, while May lost only 565k jobs. While a reduction,
it is better described as a less horrendous situation, and not
a cause for either celebration or herald of recovery. For instance,
check the Bureau of Labor Statistics smoking gun in the B-D
Model details (CLICK HERE)
on construction jobs. It adds 43k such jobs in May and 38k in
April, when the official aggregate reported 110k lost construction
jobs in April and another 59k in May. The two sources are in
direct conflict. More dissection is in order to expose big sleight
of hand, pure deception.

John Williams of the Shadow Govt Statistics
points out another perversion to the May Jobs Report. In his
words, " Accordingly, I have estimated a monthly upside
bias for May of 60,000 (the monthly average in place after seasonal
adjustment) plus 44,000 (the added bias for May 2009, which
likely has not been redistributed over all the months with appropriate
seasonal adjustment), for a total of 104,000. I have no argument
with those looking to net out the total 220,000 monthly bias;
the only issue is seasonal adjustment, and those monthly factors
are being played with and revised every month." Hence,
remove the Birth-Death Model fictional addition to jobs, and
remove the constantly changing seasonal adjustment, and this
would add another 100k to 110k jobs lost. That would put the
adjusted May Job loss in the 638k to 648k range. THIS IS
PURE DATA CORRUPTION AT ITS WORST.

Compare this fully unadjusted job loss number
with the April 730k job loss figure, and not much change at
all. The seasonal adjustment mechanism is being altered every
month, when it should be constant throughout the entire year
and only experience changes every several years. That was our
policy at Staples when the Jackass was solely in charge of seasonal
adjustment analysis, calculations, and index management. In
other words, it no longer is a stable seasonal adjustment, but
rather a political propaganda adjustment factor. The constant
alteration in this adjustment is testament to the still accelerating
corruption of US economic statistics.

The official nonsense and propaganda, more
like cheerleader role for a team losing badly on the field,
is stark. Richard Yamarone, an economist at Argus Research,
said " This tide is turning. We expect this trend of
slower job loss to continue throughout the year."
He must be impressed by the Birth-Death Model and seasonal adjustment
chronic rejiggering, blind to the USEconomy with foreclosures,
housing price decline, and real bank losses. Believers of USGovt
statistics proceed at their own peril. The jump in official
jobless rate from 8.9% to 9.4% contradicts the so-called less
bad scenario they claim is unfolding. At 9.4%, unemployment
in May is the highest rate since August 1983. Some economists
actually claim that hundreds of thousands of people, perhaps
feeling more confident about their job prospects, streamed back
into the labor force last month looking for work. Thus the rise
in the jobless rate. In other words, they admit the broader
U-6 jobless rate is more the reality. Including laid-off workers
discouraged and no longer looking for new jobs or who have settled
for part-time work, arrives at the so-called underemployment
rate, labeled the U-6. At 16.4% in May, it is the highest on
record dating to 1994. Lastly, the number of people out of work
six months or more rose to nearly 4 million in May, a record,
and triple the total from when the recession began back in December
2007. Labor Secretary Hilda Solis called the uptick in unemployment
' unacceptable' and pledged to bring it down by helping
the unemployed get new skills or training. Does she mean high
school and college mathematics and science, like student across
Asia have, but which are minimally required in US schools?

Bear in mind that nine months after the Lehman
Brothers collapse, the USGovt is trying to put in a favorable
light job loss data that is at double the pre-Lehman levels.
A closer granular look at the May Jobs report reveals that businesses
continue to reduce work hours. The workweek hit a new record
low of 33.1 hours, compared to 33.2 hours in April. The three-month
trend in workweek is at a minus 8.6% annual rate. Regard this
as the ugly side of salvaged productivity during a falling GDP.
Job loss data would be a few hundred thousand worse if companies
cut workers instead of work hours. Lastly, consider the jobless
claims, the weekly measure of new cases of people who lost their
job applying for state unemployment insurance. In the week of
June 6th, another 601k claims were made to log 621,750 as a
4-week moving average. The better statistic in this regard
is the continuing claims, at 6.816 million, the 19th consecutive
record week. This is the tragedy. The continuing claims
net out those who find new jobs. It cannot be fudged. It is
impossible to claim any good news when this net figure sets
records, and easy to refute the doctored overall May job loss
figure.

◄$$$ RETAIL SALES ACCELERATE TO THE DOWNSIDE
$$$. Again, hardly a green shoot, but more like a green dagger
extending worse into the heart of the USEconomy. May retail
sales fell by 5.9%, a very negative sign. As CreditSights wrote,
" Reversing the true course of consumer spending is
likely to be a long, sustained, and difficult effort, and one
which will remain burdened by an employment (and, by association,
a personal income) environment which has only recently begun
to slow its fiery descent, leaving
in its path a collective job loss that dwarfs any seen in recent
economic downturns." The percentages presented in
the graph are monthly changes in retail sales. Perhaps the May
decline is a reaction after tax payments in April. More likely
it is the beginning of a second phase in USEconomic decline.

◄$$$ CREDIT CARD DISTRESS POINTS TO USAGE
FOR DAILY EXPENSES ON AN ONGOING BASIS, HARDLY EVIDENCE OF RECOVERY
$$$. This data refutes any USEconomic recovery. People are depending
upon revolving credit in desperation, no longer able to draw
cash from their home ATMs, the home equity line of credit and
second mortgages. Credit card delinquencies jumped 11% in
the latest quarter versus a year ago, and jumped by 9.1% over
the previous quarter, according to a credit reporting agency
TransUnion. The delinquency rate is defined as the ratio
of borrowers 90 days or more delinquent on at least one credit
card. The DQ rate increased to 1.32% in 1Q2009. The average
credit card debt balance rose 4.09% from the previous year to
$5729, a figure calculated by TransUnion from 27 million individual
credit files. In a gradually tightening vise, households turn
to credit cards, as banks have tightened lending standards.
They do so because of a heightened default risk, as job losses
mount, foreclosures continue, and job pay cuts become common.

The state by state data reflects the ' GoGo'
housing bubble state locations. Delinquency rates were highest
in Nevada at 2.44%, then Florida at 1.9%, then Arizona at 1.68%.
Rates were lowest in North Dakota at 0.73%, then South Dakota
at 0.77% and Alaska at 0.77%. TransUnion provides an outlook,
actually more like an agency forecast. They expect the 90-day
delinquency rate will continue rising toward 1.7% by the end
of 2009, from the 1.32% in the first quarter. TransUnion expects
Nevada at 2.95% will have the highest delinquency rate by the
end of 2009. Peak DQ rates could be seen in late 2010 or early
2010. They cite the USEconomy' s response to stimulus and
remedy as very uncertain and problematic. In my view, the USGovt
measures are way off the mark for effectiveness. Outside influences
could have unforeseen effects from policy and legal changes,
the report cautioned. " The impact the changes to credit
card regulations and associated legislation, and the response
of card lenders to those changes, will have on consumer behavior
and hence delinquency rates, is still unknown." See
the Money CNN article (CLICK HERE).
At the end of 2008, credit card debt stood at $972.73 billion,
up by 1.12% from the end of year 2007. Expect it to rise much
further.

◄$$$ HOUSING SECTOR & MORTGAGE FINANCE
WERE CRIPPLED IN THE LAST MONTH, AS MORTGAGE RATES ROSE ALMOST
100 BASIS POINTS $$$. Mark Hanson, aka Mr Mortgage, has provided
a shocking graphic. It shows that for California foreclosed
properties, exactly half the amount on the loan equals the amount
in deficit. In other words, exactly half on average of
the current California home values equal the original mortgage
loan balance, for a shocking 50% value to loan ratio.
Put yet another way, properties are worth half the amount of
the loans held against them! Mortgage rates shot upward along
with long-term USTreasury Bond yields in the last few weeks.
Typically, the mortgage rates track the 10-year USTNote bond
yield. The difference addresses loan risk and profit margin
for lenders. The housing market just hit a brick wall, again,
for the fifth or sixth time. See his expert Field Check Group
website on mortgages (CLICK HERE).

Hanson wrote after the first week in June,
" Make no mistake about it. New mortgage market
loan production died this week. I am already hearing
analyst and press chatter about how the renewed optimism surrounding
a macro economic recovery will outshine the 100bps rise in rates
experienced in the past few weeks. Put it this way, when rates
rose sharply to 6% on various occasions in 2004-2006, fixed-rate
business dried up immediately. People were much more positive
about their prospects in 2005 than they are today. For that
matter, rates are not much better today then in 2008, which
was one of the lowest volume years on record. Rates in the high
5%' s are a killer for this mortgage and housing market,
period. The consumer stabilization thesis that has
become consensus over the past few months in part relies upon
cheap mortgage money and the refinancing and modifying of America.
At today' s interest rate levels, that
thesis is out of the window. With
rates comfortably in the mid-to-high 5%' s, refinance rate
locks are down 80% from a few weeks ago. In order for a loan
to fund, it must be locked. Therefore, at least a
couple hundred billion [dollars] in unlocked mortgages presently
submitted and in process at lenders around the nation are in
jeopardy of dying. Obama' s 105% refinance that
was suppose to benefit up to 5 million homeowners, 15% of all
GSE [Fannie Mae & Freddie Mac] loans is also a non-starter
with rates this high. Can the economic rebound that is also
now consensus and pushing bond yields through the roof really
be enough (soon enough) to help millions of underwater, over-levered
homeowners around the nation? Without low rates, homeowners
will have to earn their way out of the deepening housing, mortgage,
and negative-equity hole." In clear terms, Hanson
explains the short-circuit in home mortgages, which cannot be
relied upon to power a USEconomic recovery.

See the mortgage comparison chart showing 100%
negative equity. When one calculates the shortfall in the
home equity versus the entire set of mortgage balances, including
both 2nd and 3rd mortgage liens, the average negative equity
across all properties foreclosed upon in May reaches the 100%
level !!! In May, the average current value of California
properties at the foreclosure stage was $232k and the average
total debt was $418k. This leaves an average negative equity
of $186k, or 80% deficit (' upside down' ) relative
to average current values. The second mortgages make the ratios
worse.

◄$$$ HOUSING PRICE DECLINE REMAINS THE
KEY ALBATROSS, THE MILLSTONE, THE CEMENT SHOES FOR THE USECONOMY
AND US BANKING SYSTEM $$$. Despite all talk of a housing market
stabilizing, it is pure nonsense. Any increase before in mortgage
applications and home sales came from foreclosure sales and
forced negative equity (short) sales. That is a horrible trend.
Now, refinances are more difficult and new mortgages are at
a halt. A housing market in decline by 15% to 20% annually in
price is a disastrous, plainly stated. The price decline is
stuck in the high end of that range. Robert Shiller is a finance
professor at Yale University, and author of the S&P Case
Shiller housing price index. It contains traded futures contracts.
Shiller believes US housing prices are in the midst of a decline
that may last for years. He cites land prices in Japan' s
major cities, which fell for 15 straight years after a 1980
housing bubble burst. Based upon data compiled by the Japanese
Real Estate Institute, prices in the Tokyo area and in five
other cities (Kobe, Kyoto, Nagoya, Osaka, Yokohama) sank 76%
from 1990 through 2005. Almost three years have passed since
the S&P Case Shiller index of US home prices peaked, having
fallen 32% from a high in the second quarter of 2006. Shiller
expects prices may continue to fall, or stagnate, in 2010 and
2011.

An estimate by the hedge fund T2 Partners LLC
calls for the national index to hit bottom in mid- 2010 after
dropping 40% to 50% from its high. Their co-founders Whitney
Tilson and Glenn Tongue regard indications that the housing
market has stabilized to be ' the mother of all head fakes'
in their words. See the Bloomberg article (CLICK HERE).
Mortgage rates have moved from 4.78% in April to over 5.5% last
week. Mark Hanson estimates that 70% of all refinance activity
has been cut off totally. The volume of refinance loans
fell by 11.8% in May. With less refinance of troubled loans
comes more foreclosures and lower housing prices, as supply
continues to overwhelm demand.

Here is my unconventional housing market view
that makes great sense. Home prices will continue to fall
until they reach the cost of construction, and possibly a little
lower, simply stated. They are near the 1990 price level
now, a Hat Trick Letter forecast made over a year ago when a
double cycle correction was stated. Worse, home prices might
go slightly below construction costs in an overshoot, hardly
uncommon. Stability in home prices should come at a level
marked both construction cost combined with the added force
of rising commodity prices used in that construction. Homes
require lumber, copper, and cement as a foundation on costs.
They are generally rising. Foreclosures and tight credit are
real factors, but the cost angle should force a long scraping
process at a bottom.

◄$$$ OPTION ARMS BEGIN TO INFLICT SEVERE
DAMAGE, PRODUCING A WAVE OF ADDITIONAL FORECLOSURES, SURE TO
KEEP HOUSING PRICES ON THE DOWNWARD SLIDE $$$. For two years,
the Hat Trick Letter has warned of a powerful wave of Option
ARM defaults as a second blow after the subprime wave. They
are insane ridiculous time bombs. They have begun to explode.
The loan was designed to offer a ridiculously low initial interest
rate for a period of three to five years, like 2% to 3% typically.
The monthly payment, again by design, is less than the interest,
resulting in a growth in the unpaid loan balance and a shrinkage
of home equity over time. That is called ' Negative Amortization'
and only in America. Falling home values make it all a worse
bomb. The loan triggers an alarm when the loan balance reaches
a threshold like 110% or 125% or 140% of the original loan.
At that time, payments escalate sharply to make up for lost
time on repayment of principal and interest. The Option ARM
loans are the most perfect device for removing homeowners from
their homes after bankrupting them, when the housing market
enters a decline. The entire concept of negative amortization
seems as destructive and idiotic as it does predatory,
with a common outcome being home loss to bankers. The decline
is now in its third year. The loans have exited the teaser rate
periods with rate resets, and the loans are hitting principal
triggers. The bombs are going off! California lies at the epicenter
of this particular chain reaction of explosions. Option ARM
recasts will exacerbate the pain for California, the state already
with the most foreclosures in the nation. The state has also
suffered massive price declines. In California, the median existing
single family home price dropped 37% in April to $256.7k from
a year ago, according to the California Assn of Realtors.

About one million Option ARM loans are estimated
to reset higher in the next four years, according to real estate
data firm First American CoreLogic. Three quarters of these
Option ARM loans will adjust in 2010 and in 2011. The peak reset
will come in August 2011 when about 54 thousand loans will recast.
Over $750 billion of Option ARMs were originated in the United
States between 2004 and 2008. California accounts for 58% of
Option ARMs, according to a report by T2 Partners. Cameron Pannabecker
is the owner of Cal-Pro Mortgage and the Mortgage Modification
Center in Stockton California. Pannabecker said. " This
[Option ARM] loan is a perfect example front to back, bottom
to top, of everything that has gone wrong over the last five
to seven years. The consumer had a product pushed on them that
they had no hope of understanding." Worse, it is predatory
and results in home loss. Susan Wachter is a professor of real
estate finance at the Wharton School of Business. She regards
the Option ARM as another threat to the housing recovery and
the USEconomy. Owners who surrender properties to the bank rather
than make higher payments for homes (which have plummeted in
value) will further depress real estate prices and further flood
the housing inventory on the market. She said, " The
option ARM recasts will drive up the foreclosure supply, undermining
the recovery in the housing market. The option ARMs will be
part of the reason that the path to recovery will be long and
slow."

Refinancing is impossible in many cases, given
the nationwide drop in prices and tighter lending standards.
Underwater loans (where home value is less than the loan balance)
do not happen at all. Under Fannie Mae and USGovt directives,
refinance of underwater loans has been executed when the deficit
is 5% or less. Mortgage rates are relentlessly rising. The average
30-year rate jumped to 5.59% in the week ended June 11th from
5.29% a week earlier, according to Freddie Mac. The delinquency
rate for Pay Option ARMs originated in 2006 and bundled into
securities is soaring, with a repeat in the 2007 vintage. The
lending institutions continued underwriting them even though
they were exposed as time bombs long ago! Over the past twelve
months, payments 60 days delinquent on Option ARM loans originated
in 2006 nationwide have almost doubled to 42.44% from 23.26%,
Deutsche Bank said. For 2007 loans, the DQ rate has leaped
from 10.1% to 35.25% for a quick disaster. The mortgage portfolio
managers are already seeing much higher levels of delinquencies
on Option ARM loans even before they reach the point of the
recast with higher rates. See the Bloomberg article (CLICK HERE).